The imminent introduction of new rules on how directors can draw an income from their businesses has led to a surge in the number of North East company owners looking for advice about how best to manage them.Gosforth-based RMT Accountants & Business Advisors has seen growing numbers of clients and other regional businesspeople looking for its help on dealing with the rule changes on dividend payments, which come in on 6 April this year.
Dividends are drawn from a company’s ‘distributable reserves,’ which are made up of current operating profits and other money in the bank, and are a more tax efficient way for most company owners to draw an income from their firms than taking a simple salary, which attracts a higher rate of income tax.
But with the changes to the dividends system including the abolition of the ten per centtax credit that is currently applied to the net dividend paid, these directors could be facing a substantial increase in their tax bills if they carry on as usual.
And Rachel Warriner, corporate tax manager at RMT Accountants, believes many company directors will now be considering taking larger dividends than usual this year while the lower tax rate is still available.
As things stand, company shareholders who are basic rate tax payers when taking all their income into account pay no additional tax on the dividends they take. Higher rate taxpayers pay additional tax of 25% of the net dividend taken, while additional rate taxpayers pay 30.56%.
Under the new rules, which will be in place for at least the present Government’s lifetime, the ten per cent dividend tax credit will go, which removes the need for dividends to be ‘grossed up’ in personal tax computations.
Basic rate tax payers will face a 7.5 per cent tax rate on the dividends they take, with higher rate taxpayers paying 32.5% and additional rate taxpayers pay 38.1%.
A new £5,000 dividend allowance will also be introduced, regardless of income level, meaning that the first £5,000 of dividend income will have a zero rate of tax. The personal allowance can also be used against dividend income.
Rachel Warriner says: “These changes have been in the pipeline for some months, but as is often the case, the closer that a deadline gets, the more focused the minds of people become on the potential impact on them.
“These new rules will to amount a major tax increase for the owners of North East SMEs, especially those who are currently drawing a tax efficient mix of dividends and salary up to the level of the basic tax band, and with many having fought very hard just to keep their businesses afloat through the recession, they may well feel punitive in the extreme.
“There may be a case for directors taking higher than usual dividends during this financial year, which would be payable at the current lower rate, and balancing this by taking lower amounts next year, but they should only consider this approach if appropriate distributable reserves are available and it isn’t going to cause cash flow issues which could have longer term repercussions.
“There’s no definitive answer on whether company directors would be better to stick with taking dividends next year or return to a salary-based income, and each person’s individual circumstances should be properly reviewed before any decision is taken on what to do.”
RMT provides the full range of financial and business advisory services through its Corporate Finance, Recovery & Insolvency, Medical and Specialist Tax divisions. For more information, please visit www.r-m-t.co.uk